China's Economic Development - Thesis Proposal Example

Chinas Economic Development INTRODUCTION Prior to the beginning of economic reforms and trade liberalization, China maintained closed and centrally planned system that kept China’s economy immobile, inefficient and relatively isolated from the world economy. However, with the opening of its door for foreign trade and investment along with implementing the policy of free market reforms during 1979, China has been able to establish itself as one of the powerful modern economies. Since last 20 years the average real annual gross domestic product (GDP) growth of China has been 10% while its counterpart such as India grew at 5.7% (Morrison, 1-37; Srinivasan, 1-45). According to the recent phenomenon of commercialization, China is one of the noteworthy examples to experience rapid transformation of economic development in comparison with the other global nations. Throughout the continuous process of growth and development of the national economy, there are numbers of significant factors that contributed to the present status of China as the world’s one of the strongest economies. In this regard, the governmental policies, continuous and strong flow of Foreign Direct Investment (FDI) can be observed to increase the national economy at a strongest position over last two decades. The extensive level of national resources and continuous restoration of trade environment within the country can also be considered as a major economic attribute that facilitated China to gain continuous development and progress of its national economy (Zhu 103-124). 1.1 THESIS STATEMENT Emphasizing the continuous pace of economic liberalization, the primary objective of this study is to bring adequate insights relating to the economic development witnessed by China since last twenty years. In order to represent an in-depth understanding of Chinese economic development, the study focuses on critically elaborating the major challenges, policies and achievements experienced by the China throughout the past twenty years. Moreover, the study would also focus on demonstrating the major economic factors of China to provide extensive contribution of its economic development. During the course of demonstrating the major economic factors, the study would further focus on its pattern of economic development, development in inequality and poverty, population, education, heath, investment and savings, fiscal policy, monetary policy financial development along with inflation and, foreign debt statistics of China. 2. CHINA’S ECONOMIC CONDITION PRIOR TO 20 YEARS 2.1 Challenges. China has been facing a problem of sustainable development for the last 20 years. The current population of China has been estimated to be 1.35 billion which has been ever increasing. (CantyMedia, “The World: Population (2014) - Top 100+”.) Lack of income-equality has been observed within the wide range of population even though there is a rapid development in the economy. The gap between the poorer and the richer group of people in the country has been promptly increasing. Moreover, it has been observed that China tremendous pressure for development as there are some regions in China which are still in the initial stage of urbanization and industrial development. As the per capita income of the rural citizens in China is very low there are people in China who live in harsh circumstances which makes it very difficult to bridge the gap between the poorer populations with that of the richer. China’s system of social security is comparatively lower as compared to the other developing nations. In addition, the geographical environment in China is quite complicated and diverse wherein large proportion of lands are not suitable for the inhabitation of human beings as these places have an environmental condition that is naturally poor. Most of the natural resources in China are located in the Western regions which had a harsh geographical environment. Thus, the cost incurred for utilization and fortification of these resources is quite high. Economic development along with social progress has been the main challenge of sustainable development in China. There are other hurdles faced by China for sustainable development which includes domestic demand is not well-adjusted with consumption and investment, the economic growth of China highly is influenced by exports and investment. Moreover, the demand of the domestic customer is not sufficient as per the requirement (Permanent Mission of the Peoples Republic of China to the UN, “The Peoples Republic of China National Report on Sustainable Development”). 2.2 Policies. In the year 2003, China became associated with World Trade Organization (WTO) that brought reformation in tariff reductions and removed non-tariff barriers. The integration of China with the world economy provided a major contribution to sustainable growth in relation to international trade and imbalances in trade. The economic policy of China removed all the barriers to trade and accepted huge inflow of foreign direct investment (FDI). In the present era, the economic growth of China has been steady due to the rapid development of manufacturing sector. The economic policy of China is aimed to use its labor work force to the maximum extent in order to increase its production. The economic policy of China provided relaxation to the trade barriers because of which there was a huge inflow of foreign investments. Therefore, the Chinese companies used this investment took the maximum benefit that instigated an economic development in the nation. It was observed that as FDI entered the Chinese market there was technology transfer and transfer of management practices which was very important for the economic growth (Tang, “Chinese Economic Policy in the 21st Century: Growth, Imbalance, and Considerations for Australia”). Moreover, the government of China has developed an economic policy of using the new investments appropriately and liquidating the present assets. There has been a change in the taxation policies and the mechanism for issuing the government bonds which has been a major contributor for the economic development of the country. As per the observation it has been observed that the policy of China is providing limitation to the industries which consume energy at a higher rate and promoting those industries related to information technology (Ligang, “The 3-dimensional framework of Chinas new economic policy”). 2.3 Achievements. In the past few years it has been observed that the economic transformation has contributed in changing China from a closed economy to the most vibrant and globally integrated economy. According to the recent report of the World Bank, between the year of 1981 and 2004 the purchasing power of 65% of the total Chinese population was estimated to be 1 US dollar for an average day which reduced to 10% resulting in a significant poverty reduction. This transformation can be considered as the major achievement for the economic development of China. There was an improvement in the allocation of the resources which led to increased efficiency of the Chinese economy. Moreover, the government policy in China focused on sustainable development by conserving energy and reducing carbon emissions which was a vital achievement of the country. In the past three decades, China had major achievements in the field of innovation, technology along with capacity and skills after the governing bodies removed its restriction on trade barriers and promoted FDI (Golley and Song, “Chinese economic reform and development: achievements, emerging challenges and unfinished tasks”). Furthermore, there are many other achievements which includes the fact that China’s economy grew faster than any other economy, the GDP growth rate of China has had a steady increase and had witnessed 10% growth consecutively for five years between the year 2003 to 2007 (Naughton, “China’s Economy: Achievements; Institutional Constraints; and Development”). 3. OVERVIEW OF CHINAS ECONOMIC DEVELOPMENT IN THE LAST 20 YEARS 3.1 Patterns of Development. China’s pattern of development since the last 20 years is associated with the growth and progress. It was observed that after 1990 there was a huge growth in the industrial production of the country. Value added on the industrial production had a constant increase in an average of 11% annually from 1993 to 2004 and the share of industries in relation to the GDP grew from 38% to 53% between the years 1990 to 2004 (Kuijs and Wang, “China’s pattern of growth: Moving to sustainability and reducing inequality”). Figure 1: Demonstration of an Increase in Value Added Production of Industries (Kuijs and Wang, “China’s pattern of growth: Moving to sustainability and reducing inequality”) It had been observed that between the year 1993 to 2004 there was 90% growth in the industries which was predominately in the form of labor productivity rather than growth in employment which resulted in huge investment and enlarged the labor capital ratio. There was a decline in the growth of employment from 5.4% in the year 1978-93 to 2.9% in 2004. Due to the slow rural labor relocation agricultural productivity growth was highly hampered. Productivity had been considered as the major source of income for every worker. As the agricultural productivity was declining, the per capita income of rural people got affected which brought a gap between the rural and urban group of people (Kuijs and Wang, “China’s pattern of growth: Moving to sustainability and reducing inequality”). Figure 2: Demonstration of the Gap between the Agricultural Sector and the Service Sector (Kuijs and Wang, “China’s pattern of growth: Moving to sustainability and reducing inequality”) 3.2 Development in Inequality and Poverty. China started agricultural reform in the early1980s wherein the government de-collectivized the agronomic lands and privatized the use of these lands. There was an increase in the rural infrastructures, the farmers were not liable to compulsorily deliver the output to the states and were allowed to have a more market oriented mix of output. It was observed that due to the steady growth in agriculture there was a reduction of poverty in rural areas. Moreover, due to the increase in productivity of agricultural products labors were able to migrate from agricultural sector to the manufacturing sector. Furthermore, as the income of the farmers increased they were able to spend more on the products and services developed by the manufacturing sector. In the last 20 years it has been observed that the proportion of people living under poverty declined from 53% to 8%. However, it has been very difficult to reduce the poverty among people in regions wherein there is high inequality as there has been a huge difference of income amongst people. The main reason for China’s rapid growth has been industrialization and as there is a huge supply of labor in China. The production has been more labor intensive which had resulted to the increase in the average income of people in rural areas and hence as facilitated in reducing poverty (Kniivilä, “Industrial development and economic growth: Implications for poverty reduction and income inequality”). 3.3 Population. China is the most populous country in the world which covers almost one fifth of the entire world population with more than 1.35 billion people. The population of China has risen on average of 0.5 million from the past 60 years and is estimated to reach nearly 1.5 million by 2030 (Banister, Bloom and Rosenberg, “Population aging and economic growth in China”). Figure 3: Demonstration of China’s Population Size (Banister, Bloom and Rosenberg, “Population aging and economic growth in China”) Life expectancy of the people in China has been increasing relatively faster wherein the current life expectancy is 73 years and it is expected to reach 80 years by 2050 (Banister, Bloom and Rosenberg, “Population aging and economic growth in China”). Figure 4: Demonstration of Life Expectancy in China (Banister, Bloom and Rosenberg, “Population aging and economic growth in China”) The ratio of working age to the non-working age has grown rapidly. It is a direct indicator of the total number of dependent’s wherein each working person will have to support its dependent. This has been a major concern as the working group in China will have to primarily support the older population that is very much dependent on the working group of people (Banister, Bloom and Rosenberg, “Population aging and economic growth in China”). Figure 5: Demonstration of the Ratio between the Working Age Group and the Non-Working Age Group (Banister, Bloom and Rosenberg, “Population aging and economic growth in China”). The ageing Chinese population has contributed towards the emergence of concerns regarding the consequence of it in the recent years. These consequences includes decline in the fertility which means that the older group of people make up the higher share of population in China, increase in the normal life expectancy and the dynamics in the age structure. This further provides an understanding that the population structure of China comprise of a larger group of older people which can directly affect the economic development (Banister, Bloom and Rosenberg, “Population aging and economic growth in China”). 3.4 Education. From the past few years it has been observed that China has been rapidly growing and education has been a major factor for the contribution to economic development. There has been a major transformation in the education system of China which might have a potential impact on the global environment. As it has been viewed that China is fully committed to the economic growth of the country, therefore there is a continuation of higher growth through up-gradation of quality and generation of innovative ideas. In the 11th five year plan of China, the major initiative that has been taken was transformation of new resources to the tertiary education. It would be worth mentioning that China was focusing on tertiary education which was more inclined towards primary and secondary education in the earlier stages. Since the year 1999, the average number of graduate students in China has had a growth of 30%. Moreover, the amount of the total students enrolled in the universities has been rising rapidly and has quintupled. It can be ascertained that reforms in the education system had helped to boost the economic growth of the country because the people who comprise of the educated group can generate more income and thus contribute to the national income and its growth. Furthermore, educated class of people will have more purchasing power due to the income derived from their employment. Moreover, if the purchasing power increases then there would be more consumption of domestic products thus resulting in the economic growth and development of the nation (Li, Whalley, Zhang and Zhao, “The Higher Educational Transformation of China and Its Global Implications”). 3.5 Health. In China, health outcome continued to progress from 1979 to 2003 at gradual pace. By 2004, China had experienced reduction of infant and mortality rate by 1.8% and 2.0%, respectively. The malnutrition rate among children in China also dropped below 10% and vaccination of children against illness such as tuberculosis and measles had extended to 98% (World Health Organization, “China: health, poverty and economic development”). Although the absolute change in health condition in China is intense, development in certain health consequence throughout 1979 to 2003 was quite less in comparison with other nations. The life expectancy rate was improved at slower rate than other medium and high income nations. Global experience proposed that economic transition can have a rapid adverse influence on health. The health improvement in China can be considered as more substantial in the context of the challenges of economic evolution. Figure 6 demonstrates the health trend of China for about 50 years with respect to life expectancy. Figure 6: Health trend of China for about 50 years with respect to life expectancy (World Health Organization, “China: health, poverty and economic development”) By 2009, the life expectancy rate of China had increased considerably from 47 years in 1960 to 74 years by 2009, representing annual growth rate of about 0.55 year. In 2009, the infant mortality rate of China was about 17 deaths per 1000 live births, an average reduction of about 3.5% per annum. However, it is worth mentioning that infant mortality rate in China is still much greater in comparisons to Hong Kong and other developed nations. For instance, in the US, the infant mortality rate was about 6.4 in 2009 in comparison with 17 in China. The child mortality rate in China had also reduced at 4.4% per annum in 2009, where 19 out of 1000 children die before reaching their 5th birthday. The following figure demonstrates the trend of mortality rate in China from 1960 to 2009. Figure 7: Trend in infant mortality rate of China of children below five years (Singh and Liu 31-48) 3.6 Investment and Savings. The economic development in China has been related with significant high rate of savings. Whereas the ‘gross national savings’ as proportion of GDP soared above 35% in 1980, the average yearly saving rate increased to 41% in 1990. With the entry of China in WTO, the progress in collective saving had enhanced from 38% in 2000 to an unparalleled 53% in 2007. Since 2000, the national saving rate of China has been one of the top among different East Asian nations such as japan and South Korea. This high saving is not only linked with national liquidity, income and economic development, but also to the global business and capital flow. The high saving has also supported high investment in China (Yang, Zhang and Zhou 1-46). According to the study of United Nations (UN), FDI flows to China increased from US$2 billion in 1985 to about US$121 billion 2013. The FDI stock in China was estimated at about US$832.9 billion and hence considered as the second biggest destination of FDI in the world after the US (see fig 7). Figure 8: Annual FDI flow to China from 1985 to 2013 (Morrison 1-37) One of the key aspects, of China’s economic development was to draw FDI which assisted in enhancing the improvement of domestic business. In 2000, China introduced ‘go global’ approach which sought to encourage Chinese organizations to invest in foreign nations. According to the UN, China has become a vital basis of global FDI outflow which had increased from US$2.7 billion in 2002 to US$84.2 billion in 2012 (see fig 8). This high investment in China is determined by huge accretion of foreign exchange reserves (Morrison 1-37). Figure 9: China’s Annual FDI Outflow from 2000 to 2013 (Morrison 1-37) 3.7 Fiscal Policy and Monetary Policy. The macroeconomic policies such as fiscal and monetary policies of China which have driven the economic progress are controlled by the State Council, on five year plan by broad programs. In China, the fiscal and monetary policies are applied by extensive variety of central and local governmental organizations. Monetary Policy The monetary policy in China is implemented by the ‘People’s Bank of China’ (PBC) and ‘State Administration of Foreign Exchange’ (SAFE). They seek to meet the economic development and inflation targets through monetary policy and also encourage the money supply and credit growth in the economy. The key monetary instruments used by PBC and SAFE are exchange rate, short-term interest rate and reserve require ratio (RRR). PBC directly set the interest rate with benchmark distinguished by the duration of deposit of loan. The benchmark rate is crucial determinant of actual deposit and loan rate and therefore influences the supply of bank deposits. As the Chinese financial system continues to grow, there is likely to growing dependence on open market action in the application of monetary policy. The Chinese government’s five year plan for economic development focuses on market oriented reform and rapid growth of non-bank elements. Over the years, China has used RRR as active instrument of monetary policy in order to control the supply of funds. Furthermore, exchange rate is also used in order to keep the value of currency within regular trading band. PBC also implemented open market programs in order to regulate the availability of liquidity in the economic system. Figure 10: China’s Monetary Policy Instruments (Sadeghian, White and D’arcy 11-20) Fiscal Policy The fiscal policy of China is implemented by various central and local governmental organizations and again State Council is liable for whole course of fiscal policy. The objective of fiscal policy is to maintain government expenditure and development in the segment of education and infrastructure. The fiscal system improvement in China has started with introduction of ‘open-door reform’ policy. From 1980 to 1993, the fiscal improvement in China occurred through two major stages. The first stage fiscal improvement during the period of 1980 to 1987 started with the change to the mechanism of contract liability for income and spending by the central and local government. The second stage of fiscal improvement during the period of 1987 to 1993 started with implementation of ‘packaged contract responsibility method’ with an interpretation to enhance the fiscal condition of the government (Naito 511-556). Fiscal policy determines the level of investment by controlling central government allocations, local revenues and borrowings. The budget balance provide useful guide to the changes in the posture of fiscal policy. China has observed budget deficit in the year 2000 and afterwards as economic growth picked up, the budget balance stimulated from deficit of about 2.5% of GDP in the year 2002, to surplus of about 0.5% in the year 2007. Furthermore, in reaction to the international economic recession, the central government of China had introduced fiscal stimulus package of about CNY4 trillion in 2008, representing 6.7% of GDP. As the economic growth of China recovered, the budget deficit correspondingly contracted to 1.1% in 2011 (see figure 11). China reflects close synchronization between its fiscal and monetary policy in order to ensure economic development. Figure 11: Fiscal Balance of China from 2002 to 2012 (Sadeghian, White and D’arcy 11-20) 3.8 Financial Development and Inflation. China has managed to maintain its macroeconomic stability through various fiscal and monetary measures. However, before 1978, China has weak financial system having centralized operation through only one single bank, PBC. It was quite unfledged with respect to those nations which had market oriented financial system. China has experienced quick and stable economic growth since the reform in financial system in 1978 with establishment of new banks and other financial organizations. Moreover, foreign banks were also gradually allowed to become integral part of China’s financial system. Several non-banking financial organizations also began to enter in the financial system of China during mid-1980s. Besides, the traditional method of centrally planning distribution of financial resources has progressively being phased out. A sequence of financial reform occurred during 1994 to 2000 comprising liberal change from centralized to less governmental and more self-governing banking operations. China formally entered into WTO in the year 2001 which was characterized by inspiring financial liberalization procedure. This liberalization is regarded as essential component of financial development and marketization in China (Zhang, Wang and Wang, “Financial development and economic growth: evidence from China”). China has also maintained moderate inflation during its financial reform. During 1982 to 1994, the average inflation rate in China was about 8% per annum. Over the period of 1991 to 1998, the inflation in China was much lower, i.e. about 9.5% in comparison with other economies such as Eastern Europe at 130% per annum. In 2014, the inflation rate of China recorded as about 2.5% per annum (see fig 11). This economic stability in China also contributed rapid financial development. Figure 12: Inflation Rate of China from 1986 to 2014 (Trading Economics, “China Inflation Rate”) 3.9 Foreign Debt. In China, the level of bad loan is quite low and is likely stay modest in nature. The local government borrowing through China’s largely free market economy has been flowed in recent years and now the foreign debts amount to about one third of the GDP. Majority of the borrowed money in China has been pumped into the infrastructure development projects and property developments which cannot provide return for many years (Roberts, “Why Chinas debt bubble wont burst”). In China, the foreign debt has increased to US$7369.86 High minus Low (HML) in the year 2012. From 1985 to 2012, the foreign debt of China averaged US$2149 that reached all-time of high of about US$7369.9 HML by 2012 and record low of about US$158.3 HML in 1985. In China, foreign debt is a part of total debt, i.e. owed to the foreign creditors. In accordance with the statistics of exchange regulator in China, the amount of foreign debt stood at US$771.95 billion by the end of 2013 June (see figure 12). Among the total amount of debt, about US$403.31 billion were global commercial loan and US$59.14 billion were loans extended by the foreign governments and other global financial institutions. Meantime, foreign debt of about US$309.5 billion curtailed from commercial borrowings amid different organizations. Majority of China’s foreign debt is subject to US dollar which is followed by Euro (Xinhua, “Chinas foreign debt stands at 772 bln U.S. dollars”). Figure 13: Foreign Debt of China from 2004 to 2013 (Trading Economics, “China External Debt”) 3.10 Type of Economy. Traditionally China had a socialist and strategic economy where government controlled every economic activity and also owned every way of production. However, presently China has transformed the socialist economy to nearly capitalist market based economy after the trade liberalization and denationalization of several government controlled organizations, thereby opening up the market for foreign companies. Currently, foreign organizations are allowed to set up business in China. However, there are certain aspects which hinder the true feature of communist economy. Since 1970s, Chinese government has gradually transformed the economy into more open which was previously closed to global trade. The economic transformation has assisted China to lift millions of residents from poverty. The Chinese government represents the economic system as Marxism with Chinese individualities. Some also consider the China as mixed type of economy. The real fact is that in China, there exists government ownership of commanding altitudes, signifying that it has a type of planned economy where private and joint venture wealth plays an important but secondary role for the country. Although presently, only one third of the economy is in government controlled, the segments which are in hand of the government generally represent the major and most important trades. The government of China control key parts such as power generation, utilities and heavy industries. China, currently possess very unusual blend of socialist, capitalist and communist thoughts for its economic activities. The economic system of China is unique from other nations and often resists categorization. Whereas several capitalist thoughts exist in the Chinese economy, multiple essential principles of capitalism do not exist such as inviolability of agreements and private property ownership among others. Similarly, several communist thoughts have been disregarded in Chinese economic system such as permitting private assortment of capital and private proprietorship of foreign investment among others which are considered as communist ideas. 3.11 Technological Development in China. The economic prosperity of China is intimately related with technological development. In past twenty years, China has demonstrated significant leaps not only in the area of market, but also in area of technology. Since late 1970s, particularly throughout 1990s, FDI had reorganized China’s industrial foundation to a large degree and elevated the industrial technology. In the year 2001, China became a nation with highest number of cell phone subscribers with 145 million consumers. The number of fixed telephone line in China was second highest in the world to about 179 million, next to the US. In the year 2002, China surpassed the biggest PC market, i.e. Japan and expected to overtake the US. In the mid-1990s, the penetration of internet in China was quite low which has become about 80 million by 2014. The products manufactured in China also observed new heights and reached beyond toys, clothes, consumer electronics products and several high-tech devices. In accordance with the report of UN, China was the tenth biggest high-tech product exporting nation in the world in 1999. In the year 2003, the high-tech exports had reached to about US$110.3 billion, representing about 41% increase than 1991. Recently, China started technology standards, particularly the third generation wireless technology and encryption method as a key technology policy appliance. In about 20 years, China has evolved itself from a closed economy, dominated by agriculture and other heavy industrial segments to an open economy, extensively driven by information technology, knowledge and abilities (Cao 2-17). China aims to become a leader in the area of technology in upcoming years. The leaders of China regard possession of high-tech autonomous innovation ability as a key aspect of its activities to establish a wealthy and powerful nation. China’s achievement in technology is gradually maturing which is advantageous to the nation, because on one hand it brings numerous opportunities and on the other hand, it can make China a possible competitor in technological segment (Yau 37-43). 4. CONCLUSION China has accomplished quick economic development in the past two decades and still has the potential to maintain high growth in upcoming years. China continues to stick with its restructuring and initiation of new policies. It is also expected that the growth in economy in China can be sustained through formation and perfection of socialist market economy system. China is also expanding the market reach and implementing various policies in order to stimulate the economy. Although economic reform in China has been crucial in generating productivity growth, the country has far surpassed the growth of other economies such as Eastern European and Latin American. Back in 1978, China had low level of productivity than these economies and by 2007; the total productivity of China has increased rapidly from 3% to 13% of the US level. In the last two decades, the leaders of China have chosen to commence economic restructuring without major political reorganization. They have applied organized changes and policy alteration in a piecemeal style that usually provided advantages to major interest groups (Zhu 103-124). In China, the quicker procedure of industrialization and urbanization along with considerable number of labor force provided sufficient support for its economic development. One special aspect regarding the economic development of China in past 20 years is its backwardness before economic reform which has enhanced the potential of the country to catch up the growth. Although the potential productivity gain in China is extensive, several challenges remain that can hinder the gain from being realized. 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